Biofuel Industry

7.37 p.m.

Lord Carter rose to ask Her Majesty's Government what is their view of the environmental, economic and agricultural advantages of a viable biofuel industry in the United Kingdom.

The noble Lord said: My Lords, I begin by saying that I am extremely grateful to my noble friend Lord Whitty, who has made a particular effort to be here this evening to respond to this debate. I tabled this Question for two reasons: first, to seek the Government's view of the prospects for a viable biofuel industry in the UK; and, secondly, to comment on the Chancellor's proposed 20p rebate on fuel duty for biofuels.

I make it clear at the outset that my Question is concerned only with biodiesel and bioethanol, and their potential use as transport fuels. There is a much wider debate about the non-food uses of agricultural crops, but that is not for this evening.

I should declare a former interest in this subject. For 30 years before I joined the Government in 1997, I was involved with United Oilseeds, a major farm co-operative that is responsible for marketing a substantial proportion of UK oilseed crops. Some years ago, United Oilseeds sponsored a car that drove from Land's End to John O'Groats fuelled entirely by rape oil, and it raised a large amount for charity along the way.

I framed the Question with three elements,

"the environmental, the economic and agricultural advantages",

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of a viable UK biofuel industry. I shall deal with each in turn. I turn first to the environmental benefits. The evidence seems to be incontrovertible that there are substantial advantages in terms of lifecycle greenhouse gas emissions in favour of biofuels compared with fossil fuels. However, this is not the time or the place to go into all of the very detailed and technical figures.

Therefore, I ask the Minister two simple questions. Do the Government accept the figures produced by the biofuel interests regarding the beneficial effect on greenhouse and gas emissions resulting from the use of biofuels? Secondly, have the Government made any calculation of the possible effect on our Kyoto and domestic targets for the reduction of emissions if biofuels were to be used on the scale envisaged by the draft EU directive; namely, if 2 per cent of road fuels by 2005, increasing to 5 per cent by 2009, came from biofuels?

The economic advantages of a viable biofuel industry appear to be substantial. The EU Commission has estimated that between 45,000 and 75,000 jobs could be created in the EUmainly in the farming regions. That is already happening in France, Germany, Spain and Austria. Therefore, the obvious question is: why not here? British Sugar, which has a considerable potential interest in the production of bioethanol from wheat and sugar beet at its existing plants, estimates that 20,000 to 30,000 jobs could be created by a 1.2 million tonne UK biofuel industry.

I shall return later to the question of the proposed 20p rebate on fuel duty. But perhaps I may ask the Minister whether the Treasury is aware of a German study which suggests that between 73 and 83 per cent of the tax forgone by duty rebates is offset by quantifiable benefits to the economy. That of course assumes that the duty rebate is set at a level to support an industry which is producing those benefits. Did the Government conduct a full and proper cost-benefit analysis before arriving at the proposed 20p rebate? Did they attempt to bring into their calculations, as an alternative, the cost and the beneficial effects of the 26 to 30 pence rebate that the industry says is the minimum required if there is to be a UK industry at all?

The agricultural advantages are clear. A new market for existing crops would provide considerable help for an industry which is suffering its worst crisis since the 1930s. Crops for biofuel would produce an economic use for set-aside land. Crops which are now being exported to produce biofuels could be processed here and create jobs and agricultural activity at home. We would be helping, albeit in a small way, to improve fuel supply security by using home-grown feedstocks which need no new agricultural technology. In the case of sugar beet, that would also help to resolve the problem which will face the EU when it comes to review the sugar beet regime in relation to the highly subsidised production of sugar beet for sugar and the disadvantage that that creates for imports from developing countries.

The case for the agricultural advantage was put to me succinctly by Mr Martin Farrow, the managing director of United Oilseeds, who said:

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"There is nothing more frustrating than sitting here with willing growers, willing processors and a market that wants to buy".

I ask my noble friend now whether the Government accept the estimates of potential crop use produced by Mr Peter Clery of BABFOthe British Association for Biofuels & Oilsif we are to meet the targets in the draft EU directive. This is not the time to go into all the figures. I am sure that the Minister is aware of the estimates of the crop use that would be required from oilseed rape, wheat, sugar beet and so on if we were to meet the targets which have been declared in the draft EU directive.

I now return to the question of the rebate on fuel duty. In my view, the Government should be prepared to consider increasing the 20p rebate if a sound case can be made on environmental, economic and agricultural grounds. I am the first to admit that such a case would have to quantify the gross cost to the Treasury of duty forgone and the net cost after quantifying the benefits. I know that that is always a difficult argument for the Treasury, which views the matter in terms of the cash forgone and not the quantifiable benefits which must be based on a certain number of assumptions.

If the Government are to meet their objective that production of bioethanol should begin in the UK in the second half of 2004, they will certainly have to rethink their approach on the lines that I have indicated. I ask my noble friend what was the basis of the 20p rebate. How did the Treasury arrive at the figure? We may all have our own views on that, but I would appreciate an informed view from the Minister on the complex and detailed calculations of the Treasury. I am sure that the Minister knows that a reasoned case was produced by the biofuel interest that showed that a rebate of between 26p and 30p per litre is essential if there is to be a UK biofuel industry. On what grounds was that case rejected?

On 29th November there was a letter in The Times from my honourable friend Mr John Healey, the Economic Secretary to the Treasury, who referred to the incentive for biodiesel introduced by the Government in July. He said:

"It is still early days, but there are already encouraging signs that the industry is being stimulated and we expect biodiesel to be available in over 80 petrol stations by the end of the year. Sales have grown steadily to over 300,000 litres in Octobera five-fold increase since the first month of production".

Will my noble friend confirm that that production of biodiesel was from recycled vegetable oils from fish and chip shops? That is not quite what we had in mind in relation to the environmental, economic and agricultural advantages of a biofuel industry.

An important point has arisen since the rebate was announced in the Pre-Budget Report. It has been pointed out that at 20p there is a real incentive to import bioethanols produced from written-off plant using products from the Lome countries and thereby avoid the EU tariff. I understand that the feedstock could be imported from third countries into Lome countries, used to produce bioethanol and then sent here. That would completely undercut any UK

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production and we would not receive the Kyoto and greenhouse gas reduction benefit as that would be counted against the target of the originating country.

I am not sure that that is what the Treasury had in mind when it produced the 20p rebate, but a simple question arises: what is the Government's assessment of the effect of the 20p rebate on imports of bioethanol? That is a crucial question. The result is that the Government, in their attempt to encourage the indigenous industry, will be seen to be encouraging overseas competitors.

It seems that we have a real opportunity to create a new environmentally friendly industry with considerable economic and agricultural benefits; but I emphasise that it needs the understanding and the help of the Government. I hope that in reply the Minister will be able to confirm that that understanding and help will be forthcoming.

7.48 p.m.

The Earl of Mar and Kellie: My Lords, I thank the noble Lord, Lord Carter, for introducing the debate and providing this chance to discuss these important matters. I regret to say that I had read the Question rather more widely than the noble Lord. I hope that the next seven minutes will not be too much of a burden for the House.

I must declare an interest in that I own farmland and woodland in Scotland and that I sell firewood. I also declare that I have been in considerable correspondence with Mr John Nicholson of Bio-power in North Wales, manufacturers of waste vegetable oil fuel for diesel vehicles, but I have no financial connection whatever with that.

The question posed by the noble Lord appears to me to relate to energy crops for transport and for the production of electricity and district heating. Those are relevant and competent issues. Noble Lords will be well aware that Dr Rudolph Diesel used peanut oil in his prototype compression ignition engines. As an aside, he encountered problems with the gumming up of the valves, but today that would be solved by the addition of a solvent. I remind the House that I am not a chemist, but rather an enthusiast.

The Question seems to me to be about the impact on the countryside of greater agricultural production of energy crops. Even in Scotland, with its proportionately greater areas of forestry, it is cheaper to import timber from Scandinavia than to harvest our own. Why is that? While we have lots of aims for the countryside, such as farm and timber production, biodiversity, the tourists' patchwork quilt and public access, the Scandinavians have approached their timber production on an industrial scale. That means huge forests as against our usually small woods.

I am not decrying our multiple aimsproduction, biodiversity, tourism and accessbut we have to understand that energy crops will deliver a uniformity into the countryside that may conflict with our other aims. Energy crops are driven by proximity in two forms. First, they need to be grown close to the processing plant. Secondly, the processing plant needs

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to be adjacent to a population centre, whether the intended use is for transport fuel, electricityto avoid the voltage dropor district heating.

In the case of a power station fired by willow coppice or woodchip, that means that the countryside adjacent to the town will need to have a fairly uniform appearance if the economies of transport are to be overcome. Similarly, the use of oilseed rape as part of a road fuel will have a different visual impact on the countrysidebright yellowand an effect on some people's respiratory systems.

Beyond the landscape issues, there are concerns about biodiesel and bioethanol. They are clearly fuels favoured by the Treasury, which has reduced the duty on them by 20p a litre, as the noble Lord mentioned. That reduction is inadequate to stimulate real investment in rape methyl esterRMEprocessing plant.

Biodiesel is not a very green fuel because it is only 5 per cent RME and 95 per cent fossil diesel. I believe that its conversion produces a lot of waste glycerol and much contaminated water from the washing process. However, it is a start.

Looking further ahead, I am impressed by the production of a biofuel, sold as Biopower V100, in north Wales. It is derived from a waste productused cooking oil collected from chip shops and commercial kitchensand refined. The resultant fuel for diesel engines gives more power and better upper cylinder lubrication. It has the huge merit of being a sustainable use of a waste product.

However, the firm Biopower has received no help from the Government and has to pay the full duty of 46p per litre. I am most concerned about a statement made by a Customs and Excise officer in the Treasury in a letter to Biopower, which said that the then DTLR,

"does not wish to encourage the use of straight vegetable oil"

SVO

"as a fuel for vehicles as their information indicates it will have significant negative environmental effects and damage vehicle engines, and could"

this is probably the most important part

"undermine the development of a viable, high quality, processed biodiesel market".

Biopower would hotly dispute the allegation of engine damage. This seems highly prejudicial towards a new industry. Does the Minister still stand by that statement? The attitude runs contrary to the approach in Germany.

In the recent Llanelli incident, it was reported that motorists had been arrested by the police and had cars impounded because they were using new, unused cooking oilstraight vegetable oilmixed with methanol in their diesel cars. I believe that that is a Customs and Excise and not a police matter. If the duty had been paid, there should be no issue.

I would note that Biopower tell me that it is difficult to get hold of the appropriate excise form, EX 103derived from the Hydrocarbon Oil Duties Act 1979

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as Customs and Excise officers do not usually stock it. Alternative road fuels are important to the future and should not be obstructed by government.

In conclusion, the noble Lord, Lord Carter, is right: there is good potential for biofuels grown in our fields, and as a sustainable crop for our farmers. This could be an immediate solution to set-aside, so long as we appreciate the industrial scale that will be needed.

7.55 p.m.

Lord Greaves: My Lords, this is the time of a debate when one normally starts by thanking everyone who has contributed to the exciting and stimulating discussion from all sides of the House. On this occasion I shall thank my noble friend Lord Mar and Kellie for standing in for everyone else, and in particular I shall thank the noble Lord, Lord Carter, for introducing this very important topic so that we can have this debate this evening.

In passing, I should inform the House that in September the Liberal Democrat conference in Brighton debated and approved a policy paper called Our Rural Future, which was produced under the auspices of my noble friend Lady Miller of Chilthorne Domer. It was very nice to see her here today. Within that policy paper we committed ourselves very firmly to the kind of programme put forward this evening by the noble Lord, Lord Carter. So, I am sure that there is a great deal of support for what the noble Lord was saying across the political spectrum. As a political party, we shall certainly not let the matter drop.

I take the view that the debate is not quite so wide as my noble friend thought it was. We are really talking about biodiesel and bioethanol. In that context, we should remember that in the pastcertainly 100 years ago for examplea large amount of land in this country was given over to producing biofuels in the form of oats for horses, which, apart from the railways, at that time provided most of the transport in this country. So there is nothing new about this issue; it is a question of adopting and adapting traditional crops for new uses.

As the noble Lord, Lord Carter, said, the issue falls within three areas. There is the environmental side which deals with carbon saving. Obviously, there are different points of view. People will argue about exactly what the carbon saving is from each particular proposal. But, nevertheless, no one can dispute that there is some there.

Fuel security is an important issue. We import 80 per cent of our road fuels in this country. We are fortunate that we do not still import the virtual 100 per cent that we used to import. Nevertheless, there is a huge question mark about oil supplies and the location of oil supplies around the world. The more oil substitutes that we can provide in this country the more the country will benefit.

There is an interesting question regarding the use of farmland. There is interesting debate going on about the future of farming in all kinds of places, as the Minister will be aware. Many people talk about food security and how far in the modern world we should

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attempt to be self-sufficient in food or in temperate food. In a fortnight there is an interesting Starred Question tabled by the noble Lord, Lord Carter, to ask Her Majesty's Government whether they consider that the balance of trade in temperate food matters.

Behind that question lies that of how much of our own food we ought to produce. My firm view is that in a European market within a wider global market, we shall probably not produce as much of our own food in future as we have recentlycertainly if the policy lines suggested by Ministers come about. Farmers may have to depend on fewer subsidies in future. Perhaps the large-scale arable farmers in the North East, East and South East of England and eastern Scotland may have to get by without any subsidy. That is clearly some time off, but if that is the case, it will be difficult for geographical and climatic reasons for such farmers to compete with many other farmers in the rest of Europe and other parts of the world.

If that is the case, those farmers will need substitute crops. Given the choice of growing crops for oil substitutesfor fueland growing crops for food, which is likely to be of most benefit to the future security of this country? There is a good case to be made that fuel has a higher priority than food. It is highly unlikely that we will be unable to gain access to secure sources of food without a cataclysmic change to the way in which the world is organised. It is all too easy to envisage circumstances in which oil supplies may be severely affected.

We then come to the questions of the rural economy and farm businesseswhether farmers will find it more difficult to compete on food crops and whether they will stay in business. If the rural economy and landscape are to survive in an acceptable way, alternative, substitute crops will be required. That is one reason why people are so interested in biofuels. Even if only set-aside land is involved, about 500,000 hectares are set aside in any given year. No one believes that set-aside is a viable long or even medium-term option. It is crazy to pay farmers for keeping land to do nothing. Even if only set-aside land is involved, surely using it for something useful would be a huge step forward.

The noble Lord, Lord Carter, asked the Minister some of the direct questions that I was going to ask, so I shall not duplicate what he said. I remind the Minister that the Curry report, on which I think he places great store, although we are not yet sure exactly how much store the Government place on it, suggested that duty on biofuels should be reduced to the level on liquid petroleum gas, which is 4.5p per litrehardly any duty, which is a radical step. So the level mentioned by the noble Lord, Lord Carter, is not radical in that context.

However, when the Government reduce duty on biodiesel by 20p per litre and, in the Chancellor's latest Statement, propose to reduce duty on bioethanol to the same level, that appears to many people to be a half-hearted approach. Perhaps the Minister can tell us on what basis that decision was made, as the noble Lord, Lord Carter, asked. Is the Treasury concerned

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about loss of revenue? At the present rate, it will not lose any revenue. If the reduction is insufficient to encourage people to carry out the capital investment required to set up plant and systems, it will not lose any revenue, because no one will produce such fuels. Is that the problem?

Is the influence of the oil lobby behind all that, as many people quietly suggest, putting pressure on the Government and restraining them from adopting a more adventurous or radical policy?

It all comes down to whether the Government believe that it is a serious way forward in making a substantial inroad into fuel consumption in this country. If they claim that they do, the level to which they propose to reduce the fuel duties does not match their rhetoric. If they do not believe in it, why do they bother with it in the first place?

The debate and the proposals made during it have reached a stage at which it would be very helpful if the Government were to publish a clear statement of policy on the matter, showing where they think that it is going and their proposals to achieve it. Then, there would be a government document that we and everybody else could debate, and we could see where we were going. At the moment, the Government take initiatives without a clear policy framework or policy commitment and adopt a rather half-hearted approach.

8.6 p.m.

Baroness Byford: My Lords, I congratulate and thank the noble Lord, Lord Carter, for having secured this important debate. Biofuels and non-food uses of crops offer great potential to us as individuals, to the environment and to our farmers. However, we will need proper government commitment to get such businesses off the ground.

As we know, crops can be used directly for generating heat or electricity. More excitingly, they can be made into biodegradable polystyrene replacements, fibre boards, pharmaceuticals and lubricants, to name but a few. In such circumstances, it is, perhaps, a little surprising that the growth of non-food crops is small and has had to struggle to get a take-up. In some instances, we know that planning permission has been sought but has not been granted. In other instances, insufficient crop acreage has raised doubts about the viability of some schemes. The Minister will not be surprised if I return to the thorny question of planning.

The Chancellor's announcement in his Pre-Budget Report of a duty cut for bioethanol equal to the 20p given to biodiesel is welcome, but the Minister was not surprised, I am sure, by the fact that the noble Lord, Lord Carter, and others indicated that industry felt that the reduction fell below what was required for commercial viability. I would hate the Minister to think that farmers are always moaning, but I suspect that even he will acknowledge that an appropriate base price must be established, if a new industry is to be a success.

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In his Statement, the Chancellor announced a 20p per litre tax cut for green fuel bioethanol. The green fuel, refined from potatoes, sugar beet or wheat, will now be taxed at the same level as biodiesel, which is refined from rapeseed. The tax break is not as generous as the one for liquefied petroleum gas, equivalent to 40p per litre. Although the Minister, Michael Meacher, indicated that further lobbying could succeed in securing further cuts, it seems strange to give a little, while accepting that more help might be needed in the future. Chris Carter, the political affairs director of British Sugar, which is considering investing in a bioethanol processing plant said, when the announcement was made, that he found it "frustrating". He said:

"We are pleased that the Government have recognised the significant environmental and economic benefits that the development of a UK based bioethanol industry could bring. However, our feasibility studies clearly show that a greater reduction will be necessary to encourage investment into this exciting new area. We continue to endeavour to present the case for increased support for bioethanol and hope that the Government will recognise this in time for the Spring 2003 Budget".

In his opening comments, the noble Lord, Lord Carter, said that it could bring between 20,000 and 30,000 jobs to the UK. Those jobs would be of great help to many struggling rural economies.

I have been critical but not too criticalobviously, 20p is better than nothing. However, I must record my delight in the announcement made today by, I think, the Argent Group Europe, which has opened the first large biodiesel plant in Scotland. That is an investment of £10 million. Indeed, that is to be welcomed. The plant will turn animal residues, fats and used cooking oils into 50 million litres of fuel per year. I understand that the plant will not be of benefit to oilseed growers. Perhaps the Minister will explain why the plant is not to use those crops. Is it perhaps because the new plant will have sufficient amounts of fats to use or is it because the processing procedure is not compatible to take oilseed rape crops?

I move from a newly announced success story to one that failed and is a worry to me; namely, the fate of ARBRE. Will the Minister explain how enterprises like ARBRE can in future be "better protected"? The Curry report tells us that we all need to co-operate and work together, but that was a co-operative and a very good venture which failed. The liquidation of such a venture is regrettable and does little to install confidence in persuading farmers to diversify in an unknown future. The Curry report into the future of food and farming recognised the role that non-food crops could play in helping to produce energy crops, at the same time giving the farming community new opportunities within their existing businesses.

I believe that biofuels have much to offer in terms of energy and in helping to reverse the unwelcome increase in greenhouse gas emissions in the transport sector, which have gone up by 5 per cent since 1990. Good quality biomass electricity and biomass heat and power can save over 80 per cent of CO 2 emissions when replacing fossil fuel sources. The British Association for Biofuels and Oils argues that biofuels have a range

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of environmental benefits. They produce fewer greenhouse gases than fossil fuels, produce fewer air pollutants and allow for the recycling of waste oils. We touched on that today with our statutory instruments, to which the noble Baroness, Lady Farrington, responded.

My honourable friend Jonathan Sayeed acknowledged the benefits from biomass in his EDM 21. He recognised that it plays a critical role in reducing our greenhouse gas emissions and noted the significant environmental and economic benefits of using farm waste, such as slurry and poultry litter, to produce energy.

I smiled slightly at "poultry litter". It took me back 40 years when I used to run a poultry unit at home. It always seemed a shame to waste the waste litter. It is good that 40 years on there is another source for it.

The Government's own Performance and Innovation Unit review of Britain's energy policy recommended in February this year that a target of 20 per cent electricity should be generated by renewable sources by 2020. Perhaps I may remind noble Lords that when we took through the Utilities Bill I tabled one or two amendments to promote the better use of non-food crops and the role that they could play.

I understand also that the DTI has created a £66 million bioenergy capital grant scheme for the project developers considering investing in electricity generating projects fuelled by energy crops. That could support six power stations and up to 100 smaller heat and power plants. Perhaps the Minister will tell us what progress has been made.

The development of those new schemes would also offer significant benefits to rural jobs and incomes. Some argue that biofuels are an interim measure only and therefore not important, and that the use of hydrogen is the goal to which we should be working. Yes, indeed, that may be the way ahead. However, I understand that a realistic time for that goal for such production on stream is 15 or 20 years away.

I know that the noble Lord, Lord Palmer, was disappointed not to be able to take part in today's debate. As noble Lords will accept, he has been one of the forerunners in promoting such discussions as we are having tonight, both in Questions for Written Answer and in debate in this House.

I sincerely thank the noble Lord, Lord Carter, for promoting this very important debate. Biofuels will give hope and opportunities to members of our farming community. For each of us individually, they will help to improve the air and the environment in which we live and work. More importantly, they will do two things: they will support and perhaps protect in futurealthough they only do so in a small way at the momentour future fuel security; and, secondly, they offer wonderful new opportunities that should not be missed.

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8.15 p.m.

The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord Whitty): My Lords, I associate myself thoroughly with the noble Baroness's penultimate point in regard to the initiative of my noble friend Lord Carter in introducing the debate. It is an indication of the tremendous advantage the House has in having him here in his new distinguished capacity of sitting on the Privy Council Benches and telling us about his experiences in agriculture. It is both nerve wracking and stimulating for those who have to reply on agricultural matters from these Benches and I thank him for introducing the debate.

The main focus of the debate has been on the possibility of using agricultural and other feedstocks to provide liquid biofuels. We also touched on the issue of biomass for energy.

In the area of transport, the Government face some fairly substantial challenges as part of our commitments under Kyoto and also, in some cases to an equivalent extent, in meeting our air quality emissions targets. On the CO2 front, it is clear that transport is the sector which still needs to be restrained if we are to meet the Kyoto targets; and a number of technological and management issues arise in relation to transport policy and the transport part of the climate change programme the Government have introduced.

We have taken action in a number of areas to encourage the introduction and take-up of cleaner fuels and technologies. We have altered quite substantially the structure of company car tax and VED to incentivise more efficient vehicles, to reduce the use of carbon-based fuels and to encourage new fuels.

We know that biofuels in this context can provide significant life-cycle reductions in CO 2 emissions compared with the now standard ultra-low sulphur diesel. Both bioethanol and biodiesel from virgin crops can reduce CO 2 by about half when compared with conventional fuels at the point of use. In the case of biodiesel, the benefits from waste vegetable oil are even greater because the life-cycle benefits are higher. We therefore believe that biofuels can play a significant part in our commitment to lower carbon fuels in transport.

The noble Baroness referred to the PIU report on energy policy and the noble Lord, Lord Greaves, asked whether biofuels will play a part in our fuels policy generally. The Government are now taking forward the recommendations in the PIU report, including the target of 2020 for renewables, which could include a significant contribution from agriculturally based renewables. We are in the process of drafting a White Paper on energy policy which should emerge in the new year. That will deal with a wide range of energy issues, including this one.

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The noble Lord, Lord Greaves, referred also to the issue of food and fuel security. We shall take that matter into consideration in the energy policy developments, although we recognise that in this context, as in others, we operate in a world market for both food and non-food crops, including energy crops.

In terms of its benefit to the agriculture side as distinct from, but supportive of, the environmental side, establishing new markets and non-food markets is an important part of how we see agriculture developing. There was a strong reference to that strategy in the Curry report, as the noble Baroness said.

The potential for feed stocks for transport biofuelsmainly oilseed rape for biodiesel and wheat and sugar for bioethanolare well established and known to farmers, and are potentially an attractive proposition from that end of the telescope as well. But the returns for farmers would need to be sufficient to compete in their terms with the established food and animal feed markets. Currently, the prices for those are higher, even given the present depressed levels of arable prices.

The effects of issues such as set-aside are complicated. The mid-term review of the common agricultural policy could in the medium term help, in the sense that it would de-couple the area aid for arable crops and would, therefore, put everything on a level playing field. In that sense, at the end of that process there would be no set-aside; but, on the other hand, it would in the short term remove the incentive to grow non-food crops on set-aside land when subsidised or regime crops cannot be grown. So the manner in which the mid-term review works its way through the system will be complicated. In any case, at the end of the day, it will be market demand for the new fuels that will determine the sustainable viability of those crops rather than the support system.

At this stage of the debate it is quite difficult to see what the structure of the support system will be in any case. But we do need to address the issue of the market. Significant other factors, such as the state of world markets, increased trade liberalisation under the WTO and so on would also enter into this. The potential for biofuels will, therefore, have to be part of this overall change in the balance of the demand and supply of crops more generally.

Fiscal measures, which have been emphasised substantially this evening, and regulatory measures can have an important effect. A cut in the duty on biodiesel of 20p per litre, which came last July, has provoked some supply of biodiesel into mainstream liquid fuels. The industry has waited for a long time for any move of this kind. It does not believe that the cut is enough, but we have given it the 20p. The letter written to the press by my colleague, John Healey, has been referred to. The figures that he gave indicate a very encouraging picture. The use of biodiesel has risen five-fold since the introduction of the duty cut, to

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over 300,000 litres a month. The indications are that those numbers will keep on rising. The industry indicates that it expects over 80 filling stations to be dispensing biodiesel blends by the end of the year.

It is true that that is based on largely waste-based production. Recycled oilnot entirely chip-shop oil, but recycled oil in generalis a big contribution to how we deal more productively with waste. I revert to a debate that the noble Baroness, the noble Lord, Lord Greaves, and I had earlier in the week. Therefore, recycling waste oil is in itself an environmental and an economic benefit.

The PBR the other week built on the change with a similar 20p per litre cut for bioethanol; and the Government have announced that they will be consulting on the best time to implement that. Clearly, the market needs to be able to deliver the bioethanol supply at the point where there are maximum benefits.

The noble Lord, Lord Carter, asked a series of questions which are related to the view which has come from the industry and from a number of independent studies that the fiscal cut needs to be larger than the 20p on biodiesel and probably bioethanol. I have no difficulty in accepting the first question that he asked; namely, whether the Government accept the beneficial effects. I have said that they are halfindeed, my notes say that the figure is 55 per cent, which is even better. So the Government have no difficulty with that.

The Government have no difficulty with the second question of whether they made a significant contribution to the Kyoto targets; that is to say, the indicative targets envisaged in the EU directive. They would yield between 0.7 and 1.5 million tonnes of carbon equivalent a year, contributing significantly to the transport sector's ability to deliver its part of the climate change targets. I accept the background to that argument.

My noble friend Lord Carter asked for details of the Treasury's cost-benefit analysis of why the fiscal cut for biodiesel and bioethanol was pitched at 20p. Academic and technical experts suggest a trigger figure between 20p and 30p. The 20p cut in biodiesel is already significantly increasing the amount of biofuel entering the mainstream supply, which indicates that a market has been provoked. In that sense, the Treasury's analysis is correct, because we have already seen movement as a result of the 20p cut. We expect to see the same results from the 20p bioethanol cut.

The noble Lord, Lord Carter, referred to the German studies. The Treasury and other departments, including the Department for Transport and the Department for Environment, Food and Rural Affairs, are also looking at German and other studies. Parallel work is being carried out in the UK at the Central Science Laboratory, which is studying the benefits for the whole economy of stimulating bioethanol and biodiesel markets in this fiscal way. The Treasury's appraisal, at this stage at least, concludes that the higher level of benefits that would result from a cut by more than 20p would not be

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justified by the return. The Government await the final version of the reports from the study conducted mainly by Sheffield Hallam and the non-food crops panel. It will feed into consideration of the position. In the energy policy context, we will be considering what needs to be done as regards transport and biomass to ensure, through various forms of stimulation, that fuel crops contribute significantly to the achievement of our energy targets.

My noble friend Lord Carter also asked whether there were agricultural benefits and whether we accepted the general estimates put forward by the industry. The European Union's indicative targets would mean that much land could be turned over to oilseed rape if biodiesel targets of around half a million hectares were met. That would be a significant new crop for the agricultural sector.

The noble Earl, Lord Mar and Kellie, and the noble Lord, Lord Carter, asked whether the changes would simply bring in imports. There is no a priori reason to think that mainly imports would be stimulated. The 20p cut has already stimulated growth in home production. We are, however, operating in an increasingly liberalised world, and I suspect that there will be imports and exports in the long run if we are all developing biofuels for transport purposes. There is no reason to suppose that the balance of trade should be to the UK's disadvantage.

Transport fuels from crops could, and should, provide major environmental benefits in terms of their carbon content. As regards their quality, they are probably beneficial, but the argument on that is more balanced. In terms of the possibility of using waste materials in a productive way, they can also help meet environmental targets. The discussions on how we support the development of such crops are being addressed in a number of different fora, but in the meantime we need to see the full effect of the 20p cut coming through. At present, the indications are very positive.

Reference was made, especially by the noble Baroness, Lady Byford, and the noble Earl, Lord Mar and Kellie, to the bioenergy side of the matter, and the £66 million programme. I cannot give figures as regards the current take-up because we have not yet reached the end of the phase during which the reports will come in. On the heat side, the results of the heat applicationthe small operationshould be available by the end of this month. Those for power generation should be available early in the new year.

Clearly there have been some disappointments on that front. Reference was made to the ARBRE project. As the noble Baroness said, there have also been some planning difficulties. All such issues need to be addressed. On the planning side, in the review of planning guidance the Government are looking at ways in which we can ensure that such guidance is more favourable to renewable energy products.

The use of virgin crops in bioenergy production is most important but so, too, is the use of waste,

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including poultry waste, to which the noble Baroness seems to be very attached. Perhaps I should not say that because that is not quite right; I should say that that was something that she was advocating. Within that area we certainly wish to see a recycling as well as a virgin crop use as we develop such projects. Again, the Government are considering different ways to stimulate the market. Such considerations will feature significantly in the biocrops/biofuel renewable sustainable dimension of our energy policy document that will be published next year.

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On all those groundsenvironmental, agricultural, economic and energy policythere is, in our view, a significant role for biocrops. We need to get the act together technically in terms of the fiscal and regulatory framework and as regards the ability of the agriculture sector to meet those markets. But a future there is. I am grateful to my noble friend Lord Carter for giving the House an opportunity to debate the issue.